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Unsecured personal loan: What is it and can I get one?

Peter Warden
The Mortgage Reports editor

The difference between an unsecured personal loan and a secured one

There’s no reason why you should know the difference between an unsecured personal loan and a secured one. Why would you?

But, if you’re thinking of getting a personal loan, it’s something worth understanding. Because it directly affects the cost of your borrowing and the risk your debt puts on your shoulders. And it’s very easy to grasp.

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Secured personal loan

Let’s start with the secured variety. Because an unsecured one is every personal loan that isn’t secured.

A secured loan is one where the borrower provides something valuable as security in case the loan goes wrong. The loan agreement gives the lender the right to seize and sell a named valuable item to cover its losses if you default.

So mortgages and auto loans are secured forms of borrowing because the lender can foreclose on your home or repo your car if you default. In more than half of states, the lender can foreclose without even going to court.

But any sort of borrowing can be secured by pretty much anything that has value. So you could put up your classic car, your stock portfolio, your Picasso or your pension as “collateral” (security) on a loan. And you should expect the lender to sell that asset if you fall behind with payments.

Check my eligibility for a personal loan up to $100k * (Sep 16th, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – MA, NV

Unsecured personal loan

An unsecured personal loan is sometimes called a “signature loan.” That’s because the only thing securing it is your signature: your good name and reputation. Oh, and your credit score.

Of course, your lender will still want its money back. And, if you default, you can expect endless harassment from debt collectors and often court action. Indeed, if things get really bad, you could ultimately face bankruptcy, which would likely see you lose your treasured valuables anyway.

But your lender doesn’t have a fast track to seizing and selling a particular asset. So, with unsecured lending, it’s taking on much more risk than it does with secured. And, to cover the losses it makes on defaulting loans, it has to charge you and other unsecured borrowers a higher rate.

Which should you choose?

So should you pay that higher rate and not put a valuable asset at risk by choosing an unsecured personal loan? Or should you cut your cost of borrowing with a secured one?

That will depend entirely on your personal circumstances. To start with, you may not own anything valuable enough for a lender to accept it as collateral. That would leave you with no choice.

Check my rate for a personal loan up to $100k * (Sep 16th, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – MA, NV

Asset rich, cash poor

But perhaps you’re rich and have plenty of assets. What then? Well, the fact you need a loan at all suggests you’re having cash flow issues. And the fact you haven’t sold assets to solve those issues may suggest those assets are “illiquid,” meaning they’re not easy to convert into cash.

So you have to make a judgment. What are the chances of your cash flow problems continuing to the point you can’t make loan payments? And how much pain would you suffer if the lender seized your collateral?

Now you can choose: Pay more for a lower risk unsecured personal loan. Or shoulder the risk yourself and pay less.

Why a personal loan?

One of the great advantages of a personal loan is that you can use the proceeds for anything you want. Some of the most popular reasons people borrow using these include:

  1. Pay an unexpected and uninsured medical expense
  2. Consolidate existing card and other debts
  3. Make home improvements
  4. Fund a business venture

But there are loads of others.

Top 12 reasons more people are using personal loans

Get your money fast

Another big advantage is that you typically get your money fast. Indeed, some lenders aim to have the cash in your bank account on the business day following your application.

Even for large loans or in complicated cases, you’ll often have your money within a week.

Inexpensive borrowing

Interest rates on personal loans are typically a fraction of what you’d pay on a credit card. If you have a truly exceptional credit score and plenty of headroom within your household budget, you could pay as little as roughly 5% APR.

Of course, lesser mortals with good or fair credit will pay more, just as they would on a new credit card. And those with terrible credit can pay up to 30%+, assuming they get approved at all.

But the only way to discover how much you personally might pay is to request quotes from multiple lenders.

Qualifying for a personal loan

Personal loan lenders prioritize two characteristics in their borrowers. That they:

  1. Can comfortably afford to repay the loan
  2. Are the sort of people who don’t welsh or renege on loans. They have a track record of responsible money management

The first they determine by looking at your household finances to see your income and outgoings, especially on other debt payments. For small loans, that inquiry might be cursory. And the second they base on your credit score and credit report.

Of course, a lender can choose to take on borrowers with tight finances and iffy credit. Indeed, some specialize in serving those groups. But it will charge higher — sometimes painfully high — interest rates to those.

Finding your loan

The same borrower with the same credit score and the same ability to make payments is often offered wildly different deals by different lenders.

That’s partly because many lenders specialize. So some serve only those with fair and poor credit while others only touch borrowers with stellar scores. Many aim for the middle ground. But go to the wrong one and you’ll likely pay too much.

Even apart from specializations, some lenders are just more expensive than others. And the only way you can be sure you’re getting a great deal is to shop around for the best rates and compare personal loan offers.

Compare Personal Loan Offers

So, by all means, start by making an application to your existing bank or credit union. Just don’t stop there. Go comparison shopping!

Check my rate for a personal loan up to $100k * (Sep 16th, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – MA, NV